15.352: Managing Innovation: Emerging Trends. Professor Eric von Hippel MIT Sloan School of Management

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1 15.352: Managing Innovation: Emerging Trends Professor Eric von Hippel MIT Sloan School of Management

2 Agenda Introduction Course Structure & Logistics Overview of course content

3 Who am I What do I study and write about? Head of the Technological Innovation and Entrepreneurship Group (TIE) at Sloan Prior to MIT, real-world innovation experience as a venture co- founder and R&D manager Research focus: The fuzzy front end of the innovation process how it works, how to make it better. Studies in: Industrial products (like semiconductors); consumer products (sports equipment); OS software

4 Why a course on emerging trends in innovation management Because: Major changes are happening the Internet and user innovation toolkits are increasingly shifting innovation from manufacturers to user innovation communities. You need to understand what is going on and why the new patterns will come into full force on your watch as managers.

5 Democratizing Innovation turns much of how we think about innovation economics on its head. von Hippel has provided us with a fascinating book that will challenge innovation theorists and businesses alike. -- Professor Yochai Benkler, Yale Law School Primary course reading On Server Free on Web after April 1, 05

6 The research on democratizing innovation is a group effort Patterns in user innovation Professor Nikolaus Franke Professor Cornelius Herstatt Karim Lakhani Professor Chistian Luthje Professor Pam Morrison Professor Glen Urban Economics of user innovation / free revealing Professor Dietmar Harhoff Professor Joachim Henkel Professor Georg von Krogh

7 Course logistics Grading: Class attendance and participation 30% Two mini-papers (7 pages) 70% For each paper: 1. Choose a topic covered in this class that especially interests you. 2. Briefly explain topic Devote 1-22 pages to this. No extra reading needed here: derive from class lectures and discussions, assigned readings and other sources of information that you may already have. 3. Expand in the direction of your interest.. Fine to draw in your personal experience and views in addition to findings from extra reading on the topic.

8 Democratizing Innovation means that users are increasingly able to innovate for themselves The mainstream manufacturer-centered centered view: Manufacturers are the developers of new products. They protect their innovations as intellectual property The new, user-centered view: Users are the actual developers of many / most new products both physical and information products Users generally freely reveal their innovations. User-developed innovations are a major feedstock for products commercialized by manufacturers. User innovation is a good thing that increases social welfare. User innovation is steadily increasing as enabling computing and communication technologies improve.

9 The current view that freely-revealed revealed user innovation might be plausible and important Open source software projects first brought the phenomenon to serious academic attention: As Lerner and Tirole (2002) put it: Why should thousands of top-notch programmers contribute freely to the provision of a public good?

10 Essential Definition The functional source of innovation depends upon the functional relationship between innovator and innovation: An innovation is a USER innovation when the developer expects to benefit by USING it; An innovation is a MANUFACTURER innovation when the developer expects to benefit by SELLING it.

11 Many users innovate Industrial products n % innovating Printed Circuit CAD Urban and vh Pipe Hanger Hardware Herstatt and vh Library IT Systems Morrison, Roberts, vh Software security features Franke and vh % 74 36% % % Surgical Equipment Luthje % Consumer products n % innovating Outdoor Products Luthje Extreme sports equipment Franke & Shah Mountain biking equipment Luthje, Herstatt, vh % % %

12 Why do so many users want custom products? Because they have custom needs 2 Meta analyses of market segmentation studies show heterogeneity of need is generally high: 5.5 segments specified on average: 46% within- segment variation remaining (Franke and Reisinger, 2003) 3.7 segments specified on average: 54% within- segment variation remaining (Franke and von Hippel, 2003)

13 User innovation is widely distributed in the case of physical (as well as information) product development: Few users developed more than one major commercialized innovation Number of users developing this Number of major innovations Innovation Type na (n) Scientific Instruments* Scientific Instruments** Process equipment*** Sports equipment**** * Source, von Hippel 1988, Appendix: GC, TEM, NMR Innovations ** Source, Riggs and von Hippel, Esca and AES *** Source, von Hippel 1988, Appendix: Semiconductor and pultrusion process equipment innovations. **** Source, Shah 2000,

14 Innovating users tend to be lead users: - experience needs ahead of others - have a strong need for a solution Innovations developed by lead users have high commercial value Morrison and several other authors Commercial value of innovations users develop goes up as lead user characteristics of innovators intensify Franke & vh

15 Users tend to innovate at the leading edge of markets where demand is small and uncertain. SO - lead user innovations offer a product feedstock for manufacturers # of users perceiving need Users can innovate more cheaply here (finding with Carliss Baldwin) Manufacturers can innovate more cheaply here Time

16 Users are the major sources of commercial products in some fields Innovations Samples: User Manufr Suplr Other NA Total (N) Scientific Instruments 77% 23% Semicon & PC Crd Process 67% 21% - 12% 6 49 Pultrusion Process 90% 10% Tractor Shovel Related 6% 94% Engineering Plastics 10% 90% Plastics Additives 8% 92% Industrial Gas-Using 42% 17% 33% 8% - 12 Thermoplastic-Using 43% 14% 36% 7% - 14 Wire Stripping Equip 25% 75% Connector Attaching Equip 4% 13% 83% Sports Equipment 58% 27% - 15% - 48

17 Example of a user innovation that became a major commercial product automated radioimmunoassay

18 Another example: The World Wide Web Berners-Lee did not set out to invent a contemporary cultural phenomenon; rather, he says, it was something I needed in my work. He wanted to simply to solve a problem that was hindering his efforts as a consulting software engineer at CERN. Berners-Lee s innovation was to apply hypertext to the growing reality of networked computers. He expanded the idea he had developed at CERN and made it available on the Internet in the summer of Technology Review,, July 1996, p.34

19 The first WebCam: Watching a coffee pot at the U of Cambridge "Convenience was the mother of invention."

20 User and Manufacturer Innovations Differ Users tend to develop Functionally Novel innovations: The first sports-nutrition bar The first scientific instrument of a new type Manufacturers tend to develop Dimension of Merit Improvements: A better-tasting tasting sports-nutrition bar Improvements to an existing type of scientific instrument

21 Users tend to develop Functionally Novel innovations Mfrs develop DOM improvements Example Scientific Instrument Innovations Type of improvement provided by innovation % of Innovations developed by users (1) New functional capability 82% (2) DOM improvements 13% Total innovation sample size: n = 64 Source Riggs & von Hippel (1994)

22 Lead users are Only Lead User innovations form the basis for new products and services of value to manufacturers. Lead Users are users that: 1. Have needs that foreshadow general demand in the marketplace; 2. Expect to obtain high benefit from a solution to their needs. (Such users are more likely to innovate Necessity is the mother of invention! )

23 Lead users often innovate collaboratively in communities Franke and Shah found that sports innovators within user communities Were lead users (high need leading edge users) Got assistance with their innovation development from others in their community Lakhani and others document the same phenomena in Open Source software projects

24 Empirical studies find innovating users often freely reveal their innovations to other users and/or to suppliers Improvements to Open Source software Improvements to iron furnaces (Allen) Improvements to mine pumping engines Improvements to Technicon clinical chemistry analyzers IBM copper interconnect technology Improvements to library information systems (OPACs) Information from user-participants in Lead User studies

25 User innovation communities can supplant product development by manufacturers EXAMPLE: Zeroprestige.org We are interested in furthering kite-powered sport by enabling an 'open source' (shared knowledge and documentation) approach to kite-building and things kite-powered in general. You are encouraged to post and add comments and knowledge to any of the postings.

26 Users develop and post kite designs - often better than designs by kite manufacturers EXAMPLE: Super high AR mountain board kite From Sebastian in Argentina.. a super high AR inflatable design for mountain boarding

27 RESULT: User Innovation Communities may drive kite manufacturers right out of product design innovation is being democratized HAS BEEN An industry of manufacturers that develop and sell kites of their own design. $100mm in equipment sales in 2002 growing fast. TODAY some firms are moving to a build only specialization leaving product innovation to the user community (Firms are starting to download and build user designs instead of creating their own kite designs.)

28 Policy Implications User-centered innovation is increasing as computing and communication costs drop. User-centered innovation increases social welfare. Should be supported by or at least not discriminated against by policy. IP is being used in ways that favor major holders (e.g., patent thickets) Since user-innovation is distributed, each innovator will have little IP is at a disadvantage. Digital Millennium Copyright Act is aimed at illegal copying but also causes collateral damage to user innovation. Affects users ability to modify and improve what they buy.